Don’t Get Married to Gold Prices Here (But Flings are OK)

Gold prices don't have what it takes to keep rallying at this pace

To say that gold prices have turned around since the beginning of the year would be an incredible understatement. During the last two months of 2013, the SPDR Gold Trust (GLD) fell 9% and was knocking on the door of multiyear lows.

Since the beginning of 2014, however, gold prices have advanced nearly 12% and look like they’re testing the waters of even higher highs.

What happened to let gold prices — and silver prices too — sidestep certain disaster and get back in a bullish mood/mode? A handful of things.

But the big question facing investors now is: Are those factors built to keep gold prices and silver prices in their uptrend?

Answer: A definite maybe.

Short-Term Gold Prices

Over the long haul, inflationary pressures and global economic turmoil tend to drive gold prices in an upward direction. In the short run, though, gold prices inversely correlate to treasury yields and the value of the U.S. dollar. (All four factors are intra-related, but the impact of interest rates and the sawbuck’s strength are the ones that matter the most day-to-day.)

With that in mind, gold’s rally this year at least makes partial sense.

Interest rates — using the yield on 10-year treasuries as the proxy — were flying high over the last two months of 2013, with treasury yields rising from 2.48% in late October to a multi-year high of 3% by the end of December. The rapid rise was spurred by concerns that the Federal Reserve was finally seeing enough strength to put the brakes on the impact of all those cheap dollars that had been injected into “the system.”

Long-Term Gold Prices

With none of the driving forces behind the U.S. dollar or interest rates poised for big change, the short-term trend for gold prices may remain bullish. The longer-term, bigger picture for gold, however, still isn’t good.